Bandit Co. will report a value of , List A, for the parking and storage facility if it prepares financial reports consistent with the , List B, principle.
Answer(s): B
An asset classified under property, plant, and equipment is measured initially at cost. This amount includes the purchase price and any directly attributable costs of bringing the asset to working condition for its intended use. Directly attributable costs include costs of, for example, site preparation, initial delivery and handling, installation, professional feese.g., those of architects and engineers), and dismantling and removing the asset and restoring the site. The purchase price is determined by adding any import fees and nonrefundable purchase taxes and subtracting any trade discounts and rebates.
A company began work on a long-term construction contract in Year 1. The contract price was US $3, 000, 000. Year-end information related to the contract is as followsIf the company uses the percentage-of-completion method of accounting for this contract, the profit to be recognized in Year 1 is
Answer(s): D
When the outcome of a contract can be reasonably estimated, the percentage-of ¬completion method for estimated recognizes revenue based on the stage of completion of the contract. One typical method for estimating the stage of completion is the calculation of ratio of the contract costs incurred to date to the estimated total cost. The percentage-of-completion at year-end on the cost-to-cost basis is 35%US $7150, 1509. The profit for Year 1 is the anticipated profit on the contract times the completion percentage. Thus, profit for Year 1 is US $350, 000 [($3, 000, 000 - $2, 000, 000) x 35%].
A vendor sells specialty inks on consignment to a manufacturer of colored paper at a price of US $200 per barrel. Payment is made to the vendor in the month the manufacturer uses the barrels in production. The vendor records revenues when the barrels are shipped and makes no adjusting entries to record unearned revenues until the December 31 closing of the books. At the end of July. the manufacturer had 40 barrels of ink on consignment. During August, the vendor consigned 50 barrels and received payment for 30 barrels. Another five barrels were returned to the vendor by the manufacturer for credit. At the end of August, what is the amount of unearned revenue contained in the vendor's accounts receivable from the manufacturer?
Answer(s): C
Under a consignment arrangement. the consignor ships merchandise to the consignee who acts as agent for the consignor in selling the goods. The goods are in the physical possession of the consignee but remain the property of the consignor and are included in the consignor's inventory. Revenue and the related cost of goods sold from these consigned goods should only be recognized by the consignor when the merchandise is sold and delivered to the final customer. Accordingly, recognition occurs when notification is received that the consignee has sold the goods. Only then are the recognition criteria for a sal. of goods satisfied: The enterprise has transferred the significant risks and rewards of ownership, the enterprise has neither continuing managerial involvement to an extent associated with ownership nor effective control over the goods, the amount can be reliably measured, it is probable that the economic benefits will flow to the enterprise, and transactional costs can be reliably measured. In this consignment arrangement. 30 barrels have been paid for, so the revenue is recognized for these barrels. The five barrels returned are not included in unearned revenue because they constitute a return of consigned goods. Accordingly, the amount of inappropriately recognized revenue is US $11, 000 [(40 consigned + 50 consigned - 30 paid for- 5 returns) x $200].
An entity that sprays chemicals in residences to eliminate or prevent infestation of insects requires that customers prepay for 3 months' service at the beginning of each new quarter. Select the term that appropriately describes this situation from the viewpoint of the entity.
Answer(s): A
The prepayment does not meet the income recognition criteria the future inflow of economic benefits is not sufficiently certain given that the entity has not done what is required to be entitled to those benefits. Thus, the amount received in advance is considered a liabilitydeferred income) because it represents an obligation to perform a service in the futurean outflow of economic benefits) arising from a past transaction.
A manufacturer receives an advance payment for special-order goods that are to be manufactured and delivered within the next year. The advance payment should be reported in the manufacturer's current-year balance sheet as a(n)
Recognition of an element of financial statemente.g., income which includes revenue and gains) requires that two criteria be met. It must be probable that any future economic benefit associated with the item will flow to or from the enterprise, and the cost or value of the item must be measurable with reliability. The usual procedures for income recognition, e.g., that income be earned, reflect these criteria. Thus, income is recognized when an increase in future economic benefits is associated with an increase in an asset or a decrease in a liability. However, the enterprise has not substantially completed what it must do to be entitled to the benfits represented by the advance payment, and the receipt of future economic benefits is not sufficiently certain to merit income recognition. Accordingly, a liability should be recognized because the entity has a current obligation arising from a past event that will require an outflow of economic benefits, that is, to deliver goods or to refund the customer's money. The delivery of good is to take place within a year of the balance-sheet date, therefore, the obligations is expected to be settled in the normal course of the operating cycle or is due to be settled within 12 months.
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